AIG's loss creation

Commentary: Infinite losses create a quandary for the government

NEW YORK (MarketWatch) -- Another layer to the onion that is American International Group Inc. has been peeled away, and again, what's underneath is not pretty.

AIG may stand to lose another $10 billion on bets it made in its financial products unit, according to a report in Wednesday's Wall Street Journal. See full story

Once the crown jewel of the insurance industry and the darling of ratings agencies such as Standard & Poor's and Moody's Investors Service
MCO, +1.73%
AIG is revealing itself to be a bottomless box of bad bets and speculation that raises questions about the insurer's disclosure practices and regulation of the industry.

As the Journal notes, AIG became a free-wheeling investment bank selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company's money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt. See AIG's rebuttal.

More troubling is that the government already has committed more than $150 billion to AIG's bailout, an amount that does not cover these potential losses. It also raises legitimate questions about AIG's relationship with Goldman Sachs Group Inc.
GS, +0.17%
-- the former firm of U.S. Treasury Secretary Henry Paulson. AIG was in danger of defaulting on billions in obligations to Paulson's former firm, according to the report.

Even if the relationship is valid, AIG's debts across the financial services industry present what the regulators call a systemic risk. Without the bailout, AIG would likely have defaulted to Societe Generale, Deutsche Bank AG
DB, -3.99%
and Merrill Lynch & Co.
MER, +1.71%

It's why the government is being forced to eat the onion, even though it's proving to be rotten.

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